1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the Department for Education (the Department), the Treasury and UK Government Investments (UKGI).
2.The government has a policy to not hold assets for which there is no public policy reason to hold them. The public policy reason for extending loans to students is to fund their higher education. Once they have graduated, and entered the workforce, government states there is no policy reason for it to hold the loans, and therefore if they can be sold in a way that realises value for money, it is government policy to do so.
3.The student loan portfolio is growing. The value of all outstanding loans rose to £102 billion in March 2018. This is expected to reach £473 billion by March 2049, but the future repayments are likely to be much less than this face value. Due to this growth in the loan book and the resulting exposure of public finances to their risks, government decided to sell a portion of the student loans.
4.In December 2017, the government completed its first sale of loans to private investors for £1.7 billion. This sale consisted of loans made to around 410,000 borrowers that became eligible for repayment between 2002 and 2006 with a total face value of £3.5 billion. The government has received 48p for every £1 of loans sold. It estimates that for loans issued before 2012 only 65%–70% by value will be repaid. Loans in this sale are expected to have even lower repayment rates as nearly half had already been repaid by the time of the sale. On 10 October 2017, the government announced a second sale. This sale has a total face value of £3.9 billion and includes loans which entered repayment between 2007 and 2009.
5.The Department explained that it sold only the rights to a stream of future repayments on the sold loans in exchange for a lump sum today. As such, government will continue to administer loans and collect repayments on current terms, and investors have no powers to change terms or collection rates or affect borrowers. UKGI estimated the repayments from the sold loans will total around £3.3 billion to 2052. Government decided to exchange these uncertain future repayments for a certain £1.7 billion now. Figure 1 shows, based on UKGI’s cash flow model, that if government had kept the loans it would have received £1.7 billion of repayments (i.e. repayments equivalent to the December 2017 sale price) by 2025.
Figure 1: Forecast cumulative repayments if government had not sold the loans.
6.The Department elaborated on why it preferred a certain lump sum today to the possibility of more money in the future, and how it measured this. It explained that this first sale is part of a programme designed to de-risk public finances and reduce public debt, however the witnesses were not able to how the sale of this portion of the loan portfolio fits within a long term strategy to reduce the risks associated with the growing overall loan portfolio. The government’s current plan is simply to achieve sale proceeds of around £12 billion by 2022 for loans issued before 2012; this focusses only on debt reduction.
7.The loans issued before 2012 (‘Plan 1’ loans), which amount to £43 billion of the overall student loan portfolio of £102 billion, are more likely to be repaid than the loans currently being issued to students (‘Plan 2’ loans). By value, there are more Plan 2 loans issued. Relative to Plan 1 loans, the average Plan 2 loan is less likely to be repaid because they are a higher value as they include both maintenance elements and course fees, the interest rates are generally higher, and the threshold income level at which borrowers repay is higher. As such the Plan 2 loans represent a greater risk within the overall loan portfolio than Plan 1 loans.
8.The government’s de-risking strategy however only focusses on the less risky Plan 1 loans and doesn’t take account of the growing pool of Plan 2 loans. The value of the Plan 2 loans depends on the terms agreed with students at the time they are issued. The Prime Minster, in February 2018, announced that here would be a “wide ranging review into post-18 education”. This review is expected to report in early 2019 and is set to look at the cost of studying for future students, including “the level, terms and duration of their contribution”. Any changes to the terms of student loans are likely to affect the value of Plan 2 loans to potential future investors.
9.The sale of the first batch of student loans raised £1.7 billion and has reduced the government’s headline measure of public sector net debt (PSND) by the full sale amount. This does not reflect the loss of future receipts from student loan repayments which would, over time, pay down debt. Other measures that do take into account the forgone future repayments show a vastly different effect of the sale. For example, public sector net financial liabilities (PSNFL) highlights an effective loss of £1.8 billion given the sale for £1.7 billion of £3.5 billion face value of loans.
10.Although the Treasury acknowledges that PSNFL is an important metric for thinking about public finances, it was not considered alongside the sale objectives. The sale objectives only focused on reducing PSND. The Treasury highlighted to us the drawback of using PSNFL, in this case being that PSNFL values student loans at 100p in the pound. It essentially assumes that all the loans will be repaid, which overstates the value given not all borrowers are expected to repay. While we understand that the loss PSNFL shows is inflated, we believe it to be no more misleading than the narrow focus on PSND. Selling the loans at any price has an immediate positive effect on PSND, which makes meeting this objective almost impossible to fail.
11.The government’s current simplistic objective of reducing PSND also meant that any sale options that may have achieved higher value for the taxpayer were disregarded.
12.This is another example of selling off assets for short-term gain, at the expense of demonstrating how the Treasury will achieve deals that are in the best long-term interests of the taxpayer. We have seen this previously across multiple asset sales that we have reported on, such as the Sale of Eurostar, and the sale of former Northern Rock assets. We are not alone in our view, with the Treasury Committee warning that the sale of these loans does not improve the government’s financial position. The Office for Budget Responsibility and the International Monetary Fund have also described this focus on reducing net debt as a “fiscal illusion”.
1 Report by the Comptroller and Auditor General, , Session 2017–19, HC 1385, 20 July 2018
2 Q 1
3 , paras 2, 1.9
4 Q 1, , para 8
5 Viscount Younger of Leckie, Government Asset Sale,
6 Q 8
8 Qq 6,7
9 Q 5
10 Qq 9, 62, 113
11 Qq 9, 53, 98–103
12 , para 1.9
13 Qq 9, 99
14 , figure 1
15 House of Commons Library, , March 6, 2018
16 Q 60
17 , para 10
18 , figure 7
19 Q 58; , para 1.8
20 Q 58
21 Q 59
22 , para 3.3
23 Committee of Public Accounts, , Session 2015–16, HC 564, House of Commons, January 2016; Committee of Public Accounts, , Session 2016–17, HC 632, House of Commons, November 2016
24 Treasury Committee, , Session 2017–2019, HC 478, House of Commons, February 2018
25 , November 2017
Published: 22 November 2018